Existing automated transaction execution markets are based on a single execution point or matching engine (i.e., a computer, server, or the like). The single execution point enables the market operator to control and monitor all market functions. In many cases, there is a second “backup” execution point to assume market operation upon indication of any instability or inoperability of the primary execution point.
Referring to FIG. 1, a traditional centralized market 100 is depicted. The centralized market 100, for example the New York Stock Exchange, has a number of participants 104 that are each collected to a single execution point (i.e., a central trading server). One drawback to a centralized market 100 is that in order for a participant 104 to execute a transaction in the market, the participant 104 must send transaction information to the execution point 108. At the central execution point 108 the transaction is executed, e.g., a sale of stock or bonds occurs, and information related to the transaction is made available to all other participants 104 in the market. In other words, all transactions in the centralized market 100 are transparent to all participants 104, regardless of whether the participant 104 was involved in the trade.
The transaction information may include the amount of stock purchased and the price of each share of stock purchased. The purchasing participant 104 and the company who's stock was just purchased have no control over the information that is displayed publicly.
The centralized market structure creates market liquidity, and therefore executable trades, by placing all bids and offers in open and transparent competition with each other. In this manner, the centralized market depends on competing offers to create pressure to reduce the offered price to secure a transaction and similarly to induce the bid side of the market to raise bids. By this competitive pressure, the centralized market secures liquidity and creates executable trades.
The current centralized market, because of the described mechanism for creating executable transactions, requires that transactions be decomposed into individual quanta of risk, such as single time period standard contract terms or specified equal amount combinations of specific time period standard contract terms. This rigidity in the market execution mechanism creates rigidity in the available transactions that the market can execute and, inherently, reduces the efficiency of risk transfer between buyers and sellers.
Another problem with current centralized markets 100 is that the seller cannot customize an offer. Rather, every participant has an opportunity to purchase the good. The central execution point structure has an advantage of creating a single interconnecting application and a central depository for system information. However, the central execution point introduces a single point of market failure, increases system fragility, and allows for data corruption at a single point.